| dc.description.abstract | The study contained in this report investigated the nature of relationship between CBR and commercial bank lending rates. We analyzed data to establish whether the CBR is an effective monetary policy tool. The data used was obtained from the CBK and covered the period June 2006 (when the CBR was introduced) to August 2009. The general approach was to use the lending rates and CBR to determine the nature of correlation between the variables, and then use regression to determine the extent of the relationship.
The T and P Values were used to test the significance of the overall model with confidence levels of 80.4%, 8S.1%, 98.S% and 99.S%. The decision criterion for rejection of the null hypothesis was at the level where the P-Value is less than the T Value (significance level).
The results from the study showed that changes in savings, deposit, overdraft, 91 day T bill, CBR and lending rates were found to have strong positive correlation. However change in savings rate did not show any statistical significance in determining lending rates at all the significance levels tested, while changes in 91 day T bill rates were statistically significant at 8S.1%, 80.4%, and 99.S% confidence levels, but not at 98.S%.
The findings of the study are consistent with other studies done by Cook and Hahn (1989) who found that the response to increments in the target rate was positive and significant at all maturities, but smaller at the long end of the yield curve. Our findings showed correlations of between 0.822 and 0.990. The correlation coefficients for overdrafts are higher than those for lending, which have maturities of between 3 and 6 years. Similar findings were also documented by Poole et al. (2002), Ellingsen and Sorderstrom (2003), Ellingsen, Soderstrom and Masseng (2004), Giirkaynak, Sack and Swanson (200S), Beechey (2007) among others.
Given the strong positive correlation among the changes in CBR, lending, savmgs, deposit, overdraft and 91 day Treasury bill rates, the CBK should put more reliance on
the CBR to achieve its monetary policy goals of price stability, low inflation and low unemployment. When announcing a change in CBR, the CBK should include a target lending rate that the commercial banks should strive to achieve within a specified time period. This will help the CBK achieve lower lending rates by managing trading around the target rate. This was ably demonstrated by Selva and Oscar (2004), in their study of the response of term rates to U.S. Fed announcements.
We therefore recommend further research on this area to guide the CBK in determining the target lending rate for a given period as well as a the amount by which the CBR
should increase to cause a given target change in lending rates. | en |
